2. Outlin
e
Elements of Inventory Management
Inventory and Supply Chain
Management
Inventory Control Systems
Economic Order Quantity
Models Reorder Point
Classification of Inventories:ABC,
VED
3. What is
inventory?
A physical resource
that a firm holds in
stock with the intent of
selling it or
transforming it into a
more valuable state.
Purpose of
inventory
management
• How many units to order?
• when to order? discount
5. Nature of
Inventories
Raw Materials – Basic inputs that are converted into finished
product through the manufacturing process
Work-in-progress – Semi-manufactured products need some more
works
before they become finished goods for sale
Finished Goods – Completely manufactured products ready for sale
Supplies – Office and plant materials not directly enter production but
are necessary for production process and do not involve significant
investment.
6. Inventory and Supply Chain
Management
• demand information is distorted as it moves away
from the end-use customer(forecast)
• higher safety stock inventories are
stored to compensate
Bullwhip
effect
Seasonal or cyclical demand
Sale of umbrella , dominos sale in weekend
Inventory provides independence from vendors
Take advantage of price discounts
Inventory provides independence between stages and avoids work
stoppages WIP inventories
7. Two Forms of
Demand
Dependent
(not used by customer directly)
• Demand for items used
to produce final
products
• Tires stored at a plant
are an example of a
dependent demand item
Independent
• Demand for items used
by
external customers
• Cars, computers, and
houses are examples
of independent
demand inventory
8. Inventory and Quality
Management
Customers usually perceive quality
service as availability of goods when
they want them
Inventory must be sufficient to provide
high- quality customer service
9. Inventory
Costs
Carrying cost
• cost of holding an item in inventory
Ordering cost
• cost of replenishing inventory
Shortage cost
• temporary or permanent loss of sales
when demand cannot be met
11. Economic Order Quantity (EOQ)
Models
• We want to determine the optimal number of
units to order so that we minimize the total
cost associated with the purchase, delivery
and storage of the product.
EO
Q
Basic EOQ model
Production quantity
model
12. Assumptions of Basic EOQ
Model
Demand is known, constant, and independent
Lead time is known and constant
Order quantity received is
instantaneous and complete
No shortage is allowed
14. EOQ Cost
Model
Co - cost of placing order
Cc - annual per-unit carryingcost
D - annual demand
Q - order quantity
Annual ordering cost =
Annual carrying cost =
Total cost =
CoD
Q
CcQ
2
CoD CcQ
Q + 2
15. EOQ Cost
Model
Q2
2
Q
0 = +
Cc
2
Qopt =
2CoD
Cc
Proving equality of
costs at optimal point
=
CoD CcQ
Q 2
Q2 =
2CoD
Cc
Qopt =
2CoD
Cc
Deriving Qopt
CoD CcQ
TC = Q + 2
TC
=
-CoD
+
Cc
-C0D
Q2
16. EOQ Cost Model
(cont.)
Order Quantity, Q
Annual
cost ($) Total Cost
Carrying Cost =
CcQ
2
Slope = 0
Minimum
total cost
Optimal order
Qopt
Ordering Cost =
CoD
Q
17. Production Quantity
Model
An inventory system in which an order is received
gradually, as
inventory is simultaneously being depleted
Also known as non-instantaneous receipt
model
Now replenishment not at once
Assumption
• Q is received all at once is relaxed
• p - daily rate at which an order is received over
time, or
production rate
18. Production Quantity Model
(cont.)
p = production rate d = demand rate
Maximum inventory level = Q - Q d
p
= Q 1 - d
p
Average inventory level =
Q
2
1 - d
p
TC = +
d
1 - p
CoD CcQ
Q 2
Qopt =
o
2C D
d
Cc 1 - p
19. Quantity
Discounts
TC = + + PD
Price per unit decreases as order
quantity increases
CoD CcQ
Q 2
wher
e
P = per unit price of the
item
D = annual demand
22. Variable Demand with a Reorder
Point
Q
LT
Time
LT
Inventory
level
Reorder
point, R
0
23. Reorder Point with a Safety
Stock
Q
Reorder
point, R
LT
Time
LT
Inventory
level
0
Safety Stock
24. Classifying Inventory
Items
ABC Classification
In any Retail organization there are large numbers
of inventories to be maintained. It is not practical to
have very stringent inventory control system for
each & every item. So with the modus of having an
effective Purchase & stores control we implement
ABC Inventory
Classification model Known as Always Better
Control (ABC) based upon Pareto rule ( 80/20
rule)
25. ABC
Analysis
Divides inventory into three classes
based on Consumption Value
Consumption Value = (Unit price of an item) (No. of units consumed per annum)
Class A - High Consumption Value
Class B - Medium Consumption Value
Class C - Low Consumption Value
26. ABC
Analysis
Item
Stock
Number
Percent of
Number of
Items
Stocked
Annual
Volume
(units) x
Unit
Cost =
Annual
Consump
tion value
Percent of
Annual
consumpti
on value Class
#10286 20% 1,000 $ 90.00 $ 90,000 38.8% A
72%
#11526 500 154.00 77,000 33.2% A
#12760 1,550 17.00 26,350 11.3% B
#10867 30% 350 42.86 15,001
23%
6.4% B
#10500 1,000 12.50 12,500 5.4% B
29. Inventory Management
Policy
A Items:
very tight control, complete and accurate records, frequent review via EOQ model.
B Items:
less tightly controlled, good records, regular review
C Items:
simplest controls possible, minimal records, large inventories, periodic review and
reorder
Some time with the view of doing Lean inventory management
Within ABC category VED ( Vital , essential & desirable factor) is introduced
with the view of further having effective control of inventory on the basis if its
being critical.
V (Vital) is the inventory where neither Substitute nor Variation Gap is allowed .
E (Essential) is the inventory which allows either of the one to be changed
D (Desirable ) is the one which can have variation in both of the parameters
30. Reference
s:
• Cox, James F., III, and John H. Blackstone, Jr. APICS
Dictionary. 9th ed. Falls Church VA: American
Production and Inventory Control Society, 1998.
• Anupindi, Ravi, et al. Managing Business Process
Flows: Principles of Operations Management. 2nd ed.
Upper Saddle River, NJ: Pearson Prentice Hall, 2004.
• Meredith, Jack R., and Scott M. Shafer. Operations
Management for MBAs. 2nd ed. New York: John Wiley &
Sons Inc., 2002.
• Stevenson, William J. Production/Operations
Management. 8th ed. Boston: Irwin/McGraw-Hill,
2005.
